Preferential bonanza

The spate of preferential offers in recent months, half of them to foreign institutional investors (FII), is yet another indication of the seemingly insatiable foreign appetite for Indian stocks.

Most of the companies that have taken the preferential route are relatively small companies, which suggests that the trend is part and parcel of the extension of FII buying into midcap stocks.

From the point of view of the issuing companies, the trend merely shows that they have been quick to capitalise on the current boom in the stockmarkets to get a good price.

For smaller companies, the main attraction of preferential offers is that they are a cheaper way to raise money, compared to doing an IPO. Even for the bigger, listed companies, it is usually possible to place these issues at or near the market price.

This is often preferable to secondary issues, where issuers may have to make offers at considerable discount to the market due to the lead time involved.

There are several positive signals emanating from the recent rush for preferential issues. Since such issues have a lock-in period of one year for investors other than promoters, the willingness of FIIs and other private equity players to invest is a sign of confidence in the company making the issue""not to speak of the Indian economy in general.

It is to avoid this lock-in provision that companies often end up in the GDR market, where shares can be placed with a few targeted investors and the company does not incur huge expenses like in an ADR issue.

Secondly, quite a few of these issues are aimed at raising funds for expansion, which is another sign of an upturn in the capex cycle.

The decision of many promoters to increase their stakes can also be seen a positive sign, indicating that they are not afraid to buy even at relatively high prices.

And finally, the interest of the FIIs in midcap stocks could be an indication that they are starting to appreciate the entrepreneurial strengths of smaller Indian companies and their potential for growth.

Some of the preferential issues are the result of loan conversions by the financial institutions into equity. This is part of the process of structural change among weaker companies.

It is also an expression of confidence in them by the financing institutions.

One cause for worry remains. Some of the companies going in for preferential issues are very small and without a track record. They would not, in any case, have been able to go in for IPOs, and the private placement route offers a convenient way out.

While they have to follow the Sebi formula for pricing their issues, their small floating stock could easily have been manipulated. The IPO process so far has been mercifully free of the usual crop of fly-by-night operators that come out of the woodwork during any bull run.

It is possible, however, that this time they may have opted for the preferential allotment route. It is up to Sebi to monitor these private placements, track the end-use of funds, and to nip any market manipulation in the bud.